Inflation is soaring above 1100%, the GDP growth rate is projected to be -32% by year end, protesters are being murdered on the streets as government offices are plundered and looted, all atop a nearly two decade long exodus of the affluent and the educated.
No, I am not describing the setting of a new Mad Max movie, but the current state of Venezuela. An OPEC nation sitting on a $20 marginal production cost, tying it with Ecuador, and winning out only to Angola’s offshore reserves at $40, making it one of the most expensive crudes in OPEC. A country with unpaid debt obligations to Russia’s government-backed oil firm Rosneft which hasn’t been paid since September 2016, and one which staked their nations prosperity on future high crude prices and lost with a federal break even crude price of $117.
Truly tragic is the corruption permeating the connection between oil rents and the people of Venezuela. Yet chaos creates supply uncertainty for purchasers, particularly those with coking capacity along the Gulf Coast waiting for heavy crude blends from Venezuelea’s Faja del Orinoco deposits, or from Mexico’s Mayan or Canada’s Western Canadian Select. As volatility vindicates high risk premium valuations and Venezuelan production and future production expectations decrease, US heavy crude refiners will continue to seek out alternative sources; particularly from competitors in the US, Mexico, Canada, Colombia, Brazil and Ecuador.
Since 2000, Canada has surpassed Venezuela in heavy crude exports to the USA despite the cost advantages of Venezuela’s, which include easier access to tidewater and a simpler geology.
Source: US Energy Information Agency
The cannibalization of Venezuela’s oil sector by an insatiable socialist politic, which charge extravagant royalties and is adverse to foreign capital investment, are typically cited as factors contributing to this occurrence.
As it stands today, American refiners import around 2,200,000 barrels of heavy crude from Canada, by which around 500,000 reach gulf coast refiners. Venezuela, in comparison, exports 700,000 barrels a day of heavy crude to the gulf coast. While Canada has captured the lion’s share of American coking capacity (the refining process of heavy crudes) since the turn of the century, Venezuela continues to capture most of it along the Gulf Coast.
In total The US gulf coast has about 7,857,000 barrels per day of heavy crude refining capacity, around 2,250,000 of which is imported. The remaining capacity comes from Mexico, at around 750,000 barrels/day, and the remaining made up by Columbia, Brazil and Ecuador, combined at around 250,000. As the chaos deepens, up to 700,000 barrels a day of input is needed to be secured at a tolerable level of risk. When this represents 31% of the market, the questions remains as to which heavy crude the refiners will choose to re-balance their portfolio of inputs.
While a dedicated analysis in of itself, the question of who will end up supplying both the lost capacity and the risk-free capacity can be at least crudely estimated through a consideration of prices, political climate and transportation capacity. While Keystone XL has so far failed to be constructed, which would have been capable of supplying 100% of the shortfall with its 830,000 barrels/day capacity, Canadian crude transportation firms have been seeking increased access to the Gulf Coast for the better part of the last decade, and have patched together a series of alternatives, such as increased use of rail and sea-barges.
Though Mexico’s export of heavy ‘Maya’ crude from their offshore oilfields have been in decline for the better part of the last two decades, also in part to a lack of upstream investment, Mexican Prime Minister Pena Nieto implemented constitutional reforms in 2015 designed to open up the Mexican oil patch to foreign investment. As a result, the EIA forecasted a 75% increase in long term production, with production increasing from 2.1 million barrels a day in 2016, to 3 million in 2025.
Like many socialist/communist nations before it, Venezuela has suffered greatly from the practical challenges of centrally planned production. While the country sits with an economically competitive resource, a lack of upstream investment, its continually increasing risk profile is making it a lack luster customer for refiners. While Canada is lacking in pipeline capacity to transport its crude to capture the market, decades long work-a rounds such as utilizing rail and river barges has dampened its negative effect.
Canada’s next biggest competitor in heavy crude, Mexico, has been plagued by mal-investment as well and is not well positioned to increase its production short term. But in the long term the constitutional reforms imposed in 2015 will make Mexico a competitor. As another nationalized crude endeavor succumbs to short-sighted investment policy and corruption, it may be worth a moment to appreciate the security against tyranny a privatized oil economy brings Canadians as well as too offer condolences to the people of Venezuela who have been made to suffer under such selfishness of its leaders.